Foreclosure sales plummeted in May after federal banking authorities reminded lenders to play by the rules when foreclosing on homes, according to a report released Wednesday.

Sales at courthouse auctions fell from April to May a combined 25 percent in Santa Clara, San Mateo, Alameda and Contra Costa counties, according to PropertyRadar, a Truckee company that tracks distressed property. There were similar declines across California, the company said.

Foreclosure sales have been declining for months and are now 70 percent below their level a year ago in those counties as rising property values pull more homeowners out of trouble and banks work on loan modifications with those who are still struggling.

That's meant fewer clients knocking on the door of short sale specialist Steve Mun of Keller Williams in Cupertino.

"The market has definitely shifted," Mun said Wednesday. "Even the people who were having difficulty making payments seem to be seeing the light at the end of the horizon."

Banks, he said, "are more willing to be accommodating."

In early May, some of the major lenders "just stopped their foreclosure sales" after receiving a guidance letter from two federal agencies, said Madeline Schnapp of PropertyRadar, which issued the report.

Advertisement

The Federal Reserve and the Office of the Comptroller of the Currency advised residential lenders and mortgage servicers to ensure that before foreclosing, borrower complaints and appeals have been addressed, the lender or servicer has legal authority to foreclose, the loan isn't in the middle of a modification, and the borrower isn't currently qualified or being considered for a modification.

In May, lenders also issued fewer notices of default, the first step in the foreclosure process. These declined 9 percent across the four counties of the East Bay, Peninsula and South Bay, according to PropertyRadar. Default notices were down 54.6 percent from a year ago.

The continuing steep declines in foreclosure sales come as banks turn to short sales and loan modifications to deal with struggling homeowners. Borrower protections under California's Homeowner Bill of Rights have also made lenders more cautious about foreclosing.

This has helped lots of homeowners, but many more are still underwater and struggling to make large mortgage payments said Adam Kruggel, executive director of the Contra Costa Interfaith Supporting Community Organization, which assists homeowners in distress.

"Clearly, California has benefited from the legislation," Kruggel said. He said he is still waiting for lenders to reduce mortgage principal for struggling borrowers.

Lenders still have plenty of foreclosed properties that they haven't put on the market. The number of foreclosed properties they hold has dropped more than 45 percent from a year ago, but they are holding 3,413 foreclosed properties in the East Bay, Peninsula and South Bay, according to PropertyRadar.

That's reduced the number of homes for sale and caused prices to jump, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland.

Foreclosed properties "are not being released by investors or banks," Brown said. "They are completely, artificially jacking up prices."

Banks responded differently to the guidance letter sent in late April, said Schnapp of PropertyRadar.

Even though Bank of America, Wells Fargo, JPMorgan Chase and Citi were already operating under the rules, some of them slowed foreclosures temporarily.